Pricing Policies & Pricing Policies & MarketingMarketing

Dr. George NortonAgricultural and

Applied EconomicsVirginia Tech

Copyright 2006

ObjectivesObjectives

Discuss nature of agricultural Discuss nature of agricultural pricing policies in developing pricing policies in developing countriescountries

Discuss agricultural marketing Discuss agricultural marketing systems in developing countries, systems in developing countries, including the role of including the role of governmentgovernment

Pricing Policy IssuesPricing Policy Issues Developing countries frequently set Developing countries frequently set

agricultural prices below market agricultural prices below market levelslevels• Why? Effects?Why? Effects?

Government can have role in Government can have role in stabilizingstabilizing prices prices• How?How?

How do we measure degree of price How do we measure degree of price distortion?distortion?

Price Ceiling and Price SupportPrice Ceiling and Price Support

PricePrice

Effects of:Effects of:Price ceiling at PPrice ceiling at Pcc

Price support at PPrice support at Pss

S

D

Quantity

Pc

Ps

Pe

QsQeQc

Deadweight loss

Price ceiling and consumer Price ceiling and consumer subsidysubsidy

Subsidy per unit

Quantity

Price

D S

P

Pw

Pd

o

0Q3 Q1 Q 0 Q2 Q4

ba

h g

c

f

d

e

Export TaxExport Tax

Price

Quantity

SD

Pw

Pd

P0

} Export tax per unit

a b c d

h g f e

Q1 Q30 Q0 Q4 Q2

Government tendency to:Government tendency to:

Adopt low price policies for Adopt low price policies for agricultural products in LDC’sagricultural products in LDC’s

Subsidize input prices for farmers Subsidize input prices for farmers with the subsidies going to a fewwith the subsidies going to a few

Why do governments get involved Why do governments get involved in trying to affect prices?in trying to affect prices?

There is often an “urban bias” There is often an “urban bias” because urban consumers have because urban consumers have political powerpolitical power• Want low food prices as food is a big Want low food prices as food is a big

part of consumer budgetpart of consumer budget• Low food prices help keep wages lowLow food prices help keep wages low

Sometimes want to tax agriculture to Sometimes want to tax agriculture to raise funds for roads, schools, etc. raise funds for roads, schools, etc.

Examples of price policiesExamples of price policies

Prices ceilings in urban areas but not Prices ceilings in urban areas but not rural areas.rural areas.Result: May find that imported grain Result: May find that imported grain moves from urban to rural areasmoves from urban to rural areas

Uniform floor price over a wide Uniform floor price over a wide geographic area.geographic area.Result:Result: Private traders buy the Private traders buy the product close to the demand center product close to the demand center but leave distant areas alonebut leave distant areas alone

Measuring the Degree of Price Measuring the Degree of Price Distortion: Nominal Rate of ProtectionDistortion: Nominal Rate of Protection

NPRNPRii = (P = (Piidd – P – Pii

wwEE00)/P)/PiiwwEE00

Where: Where: NPRNPRii = Nominal producer protection rate = Nominal producer protection rate of the raw product at the farm gateof the raw product at the farm gate

PPiidd = Domestic farm gate price in local currency = Domestic farm gate price in local currency of the product in raw formof the product in raw form

PPiiww = Estimated border price of the raw product = Estimated border price of the raw product adjusted for (subtracting) the marketing marginadjusted for (subtracting) the marketing margin

EE00 = Exchange rate. May be an official rate or an = Exchange rate. May be an official rate or an equilibrium exchange rateequilibrium exchange rate

Direct short-run effects of price policiesDirect short-run effects of price policies Changes in consumer & producer pricesChanges in consumer & producer prices Changes in quantities produced and Changes in quantities produced and

consumedconsumed Changes in exports, imports, and foreign Changes in exports, imports, and foreign

exchange earningsexchange earnings Income transfersIncome transfers Government budget effectsGovernment budget effects Price stability effectsPrice stability effects Changes in marketing margins and their Changes in marketing margins and their

effects on resource allocationeffects on resource allocation

Indirect and long-run effects of price Indirect and long-run effects of price policiespolicies

Employment changesEmployment changes

Incentives for capital investment changedIncentives for capital investment changed

Incentives for technical change affectedIncentives for technical change affected

Changes in health and nutritionChanges in health and nutrition

Misallocation of resources in production, Misallocation of resources in production, storage, transportation, and processingstorage, transportation, and processing

Effects on land valuesEffects on land values

Two major marketing functionsTwo major marketing functions

Transform products in time, space, or Transform products in time, space, or form through storage, transport, or form through storage, transport, or processingprocessing

Communicate signals to producers Communicate signals to producers and consumers about the costs of and consumers about the costs of buying something or the benefits of buying something or the benefits of selling itselling it

Links Between Food Price Policy Links Between Food Price Policy and Food Marketingand Food Marketing

StorageStorageTransportationTransportationProcessingProcessingExchange ownershipExchange ownershipPrice informationPrice information

* price level* price level* price stability* price stability* price margins* price margins

Allocation of resources on the basis of price Allocation of resources on the basis of price signalssignals

* supply (farm income)* supply (farm income)* demand (nutrition)* demand (nutrition)* efficient resource allocation* efficient resource allocation

Food MarketingActivitiesPrice

Policy

Deficiencies in agricultural marketing Deficiencies in agricultural marketing systems in developing countriessystems in developing countries

Infrastructure – roads, storage, Infrastructure – roads, storage, utilitiesutilities

Producers lack informationProducers lack information

Weak bargaining position of Weak bargaining position of producers in some casesproducers in some cases

Government-induced distortions in Government-induced distortions in some casessome cases

What is the legitimate role of What is the legitimate role of government in marketing?government in marketing?

Provide infrastructureProvide infrastructure

Provide market informationProvide market information

Provide grades and standardsProvide grades and standards

Provide needed regulations (health Provide needed regulations (health and safety, weighing practices, legal and safety, weighing practices, legal codes)codes)

SupermarketsSupermarkets

Beginning to see Beginning to see some development some development of supermarkets in of supermarkets in retail food retail food marketing in large marketing in large cities in developing cities in developing countries. countries.

ConclusionConclusion

Pricing and marketing institutions Pricing and marketing institutions create incentives, positive and create incentives, positive and negative, for allocating production negative, for allocating production resourcesresources

These institutions are essential but These institutions are essential but frequently require changes for frequently require changes for agricultural development to occur. agricultural development to occur.